Understanding Annual Percentage Rate (APR) on Credit Cards

Many Credit Card holders may not be aware of the additional amount incurred if they do not pay the credit bills on time. This additional amount (or charge) is calculated by taking into account the Annual Percentage Rate (APR) on your Credit Card.

But what is the annual percentage rate for Credit Cards? Why do you need to know about APR before opting for the Credit Card apply online option? Keep reading if you wish to know the answers to these and other such important questions.

Annual Percentage Rate (APR) on Credit Cards: Meaning

The annual percentage rate is the cost of borrowing money on your Credit Card. When you borrow money on your Credit Card and do not pay the outstanding amount before the end of the grace period, your card issuer imposes a Credit Card interest rate (also known as finance charge) to the total borrowed amount.

APR includes the Credit Card interest rate plus any other additional fees and charges specified by the Credit Card issuer. In essence, this is the total annual cost paid to the Credit Card issuer when repaying the borrowed amount.

Types of APR (Annual Percentage Rate) on Credit Cards

• Purchase APR: Charges on regular purchases made through the Credit Card.
• Penalty APR: This APR is applied on those Credit Card holders who do not follow the terms and conditions of the Credit Card (for example- late payments).
• Cash Balance APR: This APR is applied when the Credit Card holder withdraws cash through the card (makes a cash advance) and carries forward that balance.
• Introductory APR: This APR remains lower as compared to other APRs and is only offered on newly opened accounts.

How to Calculate APR on Your Credit Card Balance?

APR consolidates both fees and interest, annualises these costs, and accounts for the effects of compounding to calculate the overall Annual Percentage Rate. The formula used to determine APR is as follows: 

APR = [(Interest + Fees) / (Outstanding amount)] x 365 / (No. of days borrowed)

Difference Between Credit Card Interest Rate and APR

Often confused for one another, these two rates are actually very different. The interest rate on Credit Cards is a charge that is levied on the outstanding balance.

On the other hand, APR is also a charge levied on the outstanding Credit Card balance, but this charge includes the Credit Card interest rate and other charges and fees levied by the card issuer. These additional charges can include processing fees, other applicable charges, etc.

Conclusion

Understanding the meaning of APR is essential to making informed financial decisions and choosing the best Credit Card. This rate is a useful parameter for choosing the right Credit Card for yourself.

A Credit Card with a lower annual percentage rate can be beneficial for you in the long run, provided that you choose the right Credit Card apply option with a competitive APR and use the Credit Card responsibly.